Pound jumps as traders bring forward rate rise forecasts to March
(Refiles to add full job title in paragraph 9)
* Pound up nearly 1%, biggest 1-day gain since June
* Traders now price 15 bps hike for March
* Sterling also helped by easing Evergrande concerns
By Tommy Wilkes
LONDON, Sept 23 (Reuters) - Sterling rallied nearly 1% on Thursday after the Bank of England said two of its policymakers had voted for an early end to pandemic-era government bond buying and markets brought forward their expectations of an interest rate rise to March.
The pound rose to as high as $1.375 GBP=D3 , putting it on course for its biggest one-day move since June, after trading around $1.3686 before the BoE announcement.
The move higher only put sterling back at Monday's levels, however, after panic about Chinese developer Evergrande defaulting on its debts this week sent investors into safer assets and currencies.
Against the euro, the British currency extended its earlier rally and was last at 85.43 pence EURGBP=D3 , 0.5% stronger on the session.
Britain's two-year bond yield, the most sensitive to interest rate moves, jumped around 9 basis points to 0.37% GB2YT=RR , its highest since March 2020.
The BoE, as expected, kept its main interest rate unchanged at 0.1% and stuck to its 895 billion pound ($1.22 trillion) asset purchase target.
Analysts said with the BoE flagging uncertainty around the inflation outlook and preferring to wait for more information before tightening, the meeting looked relatively dovish.
But investors jumped on news that policymaker Dave Ramsden had joined Michael Saunders in voting for an early end to the central bank's programme of government bond purchases even though policymakers voted unanimously to leave interest rates unchanged.
"The 7-2 vote is the beginning of a shift towards higher rates & boosts the chances that QE (quantitative easing) ends earlier than expected," said Neil Jones, London-based head of FX Sales for Financial Institutions at Mizuho.
Money markets brought forward their BoE rate hike expectations after Thursday's meeting, with an initial 15 bps hike from the record low of 0.1% now priced in for March 2022, from May previously BOEWATCH .
"The text comments are looking more hawkish in mind. We should continue to see further pound strength across the board & in increase in the chance of rate hike."
Viraj Patel, a macro analyst at Vanda Research, noted markets now priced in a base rate of 0.5% by September 2022 from November 2022 before the meeting.
"That's 2 hikes by next year (15 bps + 25 bps) when the Fed is still tapering in this period. Only downside risks to this... and history suggests central banks tend to disappoint on tightening. Good time to fade $GBP," he said, suggesting traders should sell the pound versus the dollar at current levels.
Before the BoE decision, the pound had already traded higher on easing concerns about the Evergrande debt crisis.
Graphic: World FX rates in 2020 Link
Graphic: Trade-weighted sterling since Brexit vote Link
after rate hke Link
Reporting by Tommy Wilkes; Additional reporting by Dhara
Ranasinghe; Editing by Angus MacSwan, Elaine Hardcastle, William
Maclean and Nick Macfie
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.